Israel financial services

Central bank intervenes to stop shekel climb

The New Israeli shekel has fallen sharply against all major currencies in the first half of February, following heavy central bank intervention in January.

Analysis

The currency traded weaker than NIS3.50:US$1 throughout the local trading week of February 12th‑16th, for the first time in 2018. The shekel's sharp decline in value versus the US dollar stands in sharp contrast to the general global trend, which has seen the dollar weaken against other developed market currencies, especially the Japanese yen.

Between the start of the year and February 16th the shekel has fallen by some 2% against the dollar, and by between 6.5% and 8.5% versus the euro, yen and sterling. However, this result obscures the fact that for much of January the shekel was climbing against the dollar. Only intensive intervention by the Bank of Israel (BOI, the central bank) succeeded in stemming the shekel's rise in value, which had taken it from an already strong NIS3.55:US$1 in mid-December to NIS3.38:US$1—its highest value in seven years—in late January.

Monthly data on foreign-exchange reserves reveal that the central bank spent more than US$1.8bn in market intervention in January, the highest monthly total in recent years. In the first half of 2017, when global dollar weakness pushed the shekel's value steadily upwards, the central bank consistently bought dollars—nearly US$6bn between February and June—but it was inactive during the second half. BOI data on currency-market activity shows that trading volumes rose in January compared with late 2017, but not to exceptional levels that might indicate a speculative attack on the shekel.

The BOI, with some support from the government, seems to have successfully defused another bout of shekel strength, one that had generated an exceptional degree of concern among exporters, who have long been concerned about the impact of the shekel's strength on export competitiveness. Some local media have sought to tie this latest shekel development to recent political developments. However, the police investigations of the prime minister, Binyamin Netanyahu, were under way throughout 2017 and their recommendation to indict him was expected. It is therefore difficult to pin the full effect of the gyrations in the currency on the scandals, although it is likely to have reinforced some downward momentum.

Impact on the forecast

Given the central bank's renewed determination to ward off further shekel appreciation, we will weaken our exchange-rate forecasts. However, we still expect appreciation overall during the 2018-22 forecast period, given strengthening external balances.